Northern Ireland Corporation Tax: Stimulating Foreign Direct Investment

As widely reported in November 2015, the “Fresh Start” Plan included the agreement that corporation tax would be reduced to 12.5% in April 2018.  Corporation tax rate reduction has been heralded as the answer to unleashing a major influx of investment in Northern Ireland and stimulating unprecedented growth.

Corporation tax at 12.5% certainly assists in putting the province on a more equal footing with our neighbours in the South who have successfully attracted such big international investors as Google, Facebook and Apple.

And the structure of the Corporation Tax (Northern Ireland) Act 2015, which will give effect to the rate reduction, is clearly looking to attract foreign direct investment. “Large” companies, ie. companies that are not SMEs, will benefit from the reduced rate on all qualifying profits attributable to their fixed place of business in Northern Ireland (referred to as the Northern Ireland Regional Establishment or “NIRE”).  That is a direct incentive for international companies to set up in Northern Ireland whilst ensuring they commit to creating jobs in, and operating from, Northern Ireland.

SMEs will also benefit from the rate reduction but there are further conditions.  The SME (ie a company with less than 250 employees, with an annual turnover not exceeding €50m and/or an annual balance sheet not exceeding €43m) has to have more than 75% of its UK workforce and costs must relate to activity carried out in NI.  If these conditions are not met, the SME will not be able to benefit from the rate reduction at all.

Certain types of trade will not qualify for the rate reduction.  The types of trade excluded are lending, investment, investment management, insurance, re-insurance and oil and gas.  The reason for such excluded activities is that profits of these types of trades could be notionally moved to Northern Ireland without necessarily having any significant trading activity taking place here and, therefore, having no great impact on employment.  Non-trading profit, such as property rental income, are similarly excluded.

As rightly pointed out by other commentators, Northern Ireland has numerous international financial firms operating here such as Citigroup, AllState and the Chicago Mercantile Exchange. The interest of the international financial industry in Northern Ireland is a real growth opportunity attracted by, amongst other things, cost efficiencies, a stepping stone to Europe and the level of skills and talent of graduates.  Stifling any future interest by not extending the corporation tax rate reduction to such firms would, at first, appear to not be in line with the policy behind the rate reduction.

However, to date the interest of international financial firms in Northern Ireland has extended to back office functions and the new Act makes provision for companies to elect for back office profit to be taxed at the reduced rate.  As these back office functions are less mobile than the excluded trading activities they support, they clearly provide the opportunity for a real increase in employment.   There is no definition of “back office” as yet in the legislation but the Treasury has the power to specify what constitutes a back office function by regulation.

With 2018 not actually that far away in terms of strategic decisions, there needs to be a focused approach to generating international investment interest in Northern Ireland as soon as possible.   There is a concern that the “Brexit” referendum on 23rd June may stall any such decision as the potential investors wait to either see if the UK remains part of the EU, or if Brexit occurs, understand the impact it may have on the UK’s economy and its trading relationship with the rest of Europe. If the UK does exit the EU, those international companies that see Northern Ireland as a gateway to Europe will need to be persuaded that any replacement trading treaties outweigh any risk posed by exiting the EU single market. Whether Brexit does or does not occur, Northern Ireland needs to position itself as a cost effective centre of excellence.

Generating FDI interest is not just a government initiative.  Local companies can also assist with through international trade partners, to which they can advocate the benefits of the rate reduction. Where they are SMEs qualifying for the rate reduction they may even be able to price more competitively.

The rate reduction can also prove a great selling point for those owners looking to exit.  It is a genuine opportunity for prospective sellers to extend their net beyond Northern Ireland when promoting the sale.  Tughans has extensive experience of international interest in local businesses.  For instance we acted on the sale of Sawyers Transport to Agro Merchants, an international logistics business and the acquisition of Telestack by Astec Industries, a US manufacturer.  These international companies have placed themselves in a good position to benefit from the corporate rate reduction in respect of their activities in NI and the rate reduction could stimulate further growth of their acquired NI companies.

If you wish to discuss the potential sale of your business or potential investment please contact Ciara Lagan, Corporate Partner (028 9082 0511; Ciara.lagan@tughans.com)

 

 

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While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.